CITI: Google should buy AIG and turn it into a fintech lab

In a note circulated on Tuesday, Citi financial analyst Todd
Bault and his team have this suggestion:

There is a real opportunity for a major tech firm like GOOGL and
an investment bank to buy AIG and turn it into an insurance
FinTech laboratory. There would be great benefits to all parties,
investors, the insurance industry, and society itself by making
insurance a better product.

Citi admits that the idea is "audacious, but that doesn't mean
it's wrong."

For those not up to speed, AIG is an American insurance Goliath
perhaps best known for its central role in the 2008 financial
crisis.

The share price graph from 2008 up to present day tells you
everything you need to know about how things have been for AIG
since then.Investing.com

So why exactly does Citi think Google's parent company Alphabet
should buy this basket case? Put simply: "We believe a tech firm
needs to control the technological development and strategy of a
major insurer in order to move insurance forward."

But, Citi says, tech companies can't just build smart new
insurance technology without the help of existing players. While
companies like AIG are behind when it comes to technology, they
have unrivalled expertise in a highly regulated, complex
industry.

So the best combination, Citi thinks, is for a deep link up —
Google should partner with a financial firm to buy AIG (Bault and
his team admit that Google's investors would never tolerate solo
ownership.)

Such a deal would solve a problem for AIG — it's facing pressure
from activist investors to break up its business and Google could
help it become more "modular," in Citi's words. This involves
developing distinct tech-based products and services that can be
assembled into larger packages like Lego bricks rather than the
current spiders web business that is difficult to split up.

A
tie-up between AIG and Google? Stranger things have
happened.REUTERS/Brendan
McDermid

But what about Google? Where's the upside for them?

Firstly, such a deal would give Google access to an unrivalled
treasure trove of data on the insurance industry that Google
could surely utilise. Given the AIG is trading at such a huge
discount — 70% of book value, a $28 billion (£19.5 billion)
shortfall — it's a bargain that shouldn't be sniffed at.

And secondly, if Google can crack the insurance innovation, it
could reap huge rewards in a huge market. Citi writes:

We cannot understate how much could be gained by solving the
insurance problem. Insurance is an exception throughout financial
services: heavily bespoke, hard to automate, does not trade in
liquid markets, and more. If you can make progress in insurance,
you have likely made progress in other areas, like managing
illiquid assets and other aspects of risk management. Simply
developing the right data models for insurance would like have
applications elsewhere.

And, appealing to Alphabet's corporate conscience, Citi says
that: "Making insurance more modular would likely better align
users and investors and allow for more coverage. Insurance fits
rather well under GOOGL’s aim to “do good.”"

For more hard-nosed investors, Citi says: "This might not even be
money losing for GOOGL if they arrange for fees as part of the
deal."

Bault and his team think only a company of Alphabet's size could
take on AIG, which is still worth a hefty $65.5 billion (£45.6
billion) despite its trading discount.

Citi sums up: "They have the size needed to pull this off. They
have the reputation for cutting edge research and data science.
They have an established commitment for “moonshot” projects."

While all that may be true, Alphabet have shown absolutely no
appetite for getting into Wall Street-style finance. What little
interest it has shown in fintech has been in consumer-facing
products like GMail payments and mobile wallets.